Strategic Underwriting: Balancing Cash Flow and Appreciation in Multifamily Syndication With Kenneth Gee

In this episode of The Same Day Podcast, host Mat Zalk sits down with Kenneth Gee, Founder and President of KRI Partners, to explore the art of multifamily syndication. They discuss effective strategies for balancing cash flow and appreciation, the importance of transparency with investors, and the role of strategic underwriting in building thriving real estate portfolios.

Strategic Underwriting: Balancing Cash Flow and Appreciation in Multifamily Syndication

Kenneth Gee is the Founder and President of KRI Partners, a real estate syndication and private equity firm specializing in acquiring and managing multifamily apartment assets in the Southern US. With over 24 years of experience in real estate, banking, private equity, and principal investing, Kenneth has been involved in transactions exceeding $2 billion, focusing on multifamily real estate projects. Previously, he served as a tax manager at Deloitte & Touche and as a commercial lender at National City Bank. Kenneth is also a licensed CPA and owned certified Cessna Pilot Centers in Northeast Ohio.

Here’s a glimpse of what you’ll learn:

• [3:06] Kenneth Gee talks about his diverse background and what led him to founding KRI Partners
• [10:22] The importance of underwriting and not relying on brokers’ opinions
• [11:16] Improving multifamily property cash flow through renovations and management
• [13:14] What should you do to improve cash flow?
• [16:42] Why Kenneth advises against being inflexible with renovation plans
• [18:39] How to de-risk renovations at multifamily properties
• [22:39] Four rules to follow before making investment decisions
• [24:44] The importance of allocating depreciation in real estate deals
• [31:06] What’s the ideal debt-to-equity ratio for single-family home investing?
• [32:11] Challenges of investing in the stock market
• [32:40] Kenneth’s advice to anyone looking to start their investing journey

In this episode…

Balancing cash flow and property appreciation is vital for success in multifamily real estate investments. How can investors strategically enhance both aspects to maximize returns? Is it possible to optimize cash flow while also driving substantial property value appreciation?

According to Kenneth Gee, a seasoned real estate investor with extensive experience in banking and private equity, effective strategic underwriting is key to achieving this balance. He underscores the importance of analyzing and forecasting potential rental income alongside meticulous management of property expenses to enhance overall property value. By focusing on multifamily properties and implementing targeted renovations, Kenneth leverages cash flow improvements to significantly increase asset appreciation over time.

Resources mentioned in this episode:

• Mat Zalk on LinkedIn
• Yoni Schmidt on LinkedIn
• Walter Bowser on LinkedIn
• Keyrenter Property Management
• Keyrenter Property Management in Tulsa | Oklahoma City | Arkansas
• Keyrenter Property Management email address: [email protected]
• Kenneth Gee on LinkedIn
• KRI Partners

Related episodes:

• “DIY Plumbing: What Owners Should and Shouldn’t Attempt Alone” with Aaron Wynn on The Same Day Podcast
• “How To Compete in the Banking Industry: Relationship-Based and Customer-Centric Service” with Jared Goldfarb on The Same Day Podcast
• “Scaling a Business: The Power of Networking” with Brandon Neth on The Same Day Podcast

Quotable Moments:

• “I wanted to take control of my life so that if I screw up my financial future, it’s on me.”
• “Don’t buy real estate without knowing what you’re going to do with it.”
• “If you’re not changing your plan when the facts of the situation change, you’re not doing what you’re supposed to do.”
• “In real estate, as long as you don’t lose the property, usually you just have to wait out anything that’s tough in the market.”
• “I want you around for the long term. Most of our people stick around; that’s the right way to treat people.”

Action Steps:

1. Start small with real estate investments to build your portfolio gradually: This approach reduces risk and allows you to learn the ropes without overwhelming yourself.
2. Seek out mentors or educational resources to understand the real estate market: Learning from experienced investors can shorten the learning curve and help avoid common mistakes.
3. Go beyond financials; consider the overall value and potential improvements to the property: Kenneth Gee discusses how value-add strategies like amenities can significantly boost property appeal and rental income.
4. Keep communication transparent and regular with your investment partners: Open lines of communication build trust and ensure all parties are informed about the investment progress.
5. Regularly reassess your investment strategy based on market dynamics: Real estate markets fluctuate, and Kenneth Gee emphasizes the importance of being adaptable to change for long-term success.

Sponsor for this episode…

Keyrenter Property Management:

This episode is brought to you by Keyrenter Property Management.

Keyrenter Property Management is a full-service property management company that helps clients buy, renovate, and operate real estate assets.

The team helps clients build wealth while taking the headache out of property management.

That’s why, no matter what rental you have — single-family homes, condos, townhomes, or apartments — they can give you the management solutions you need.

To learn more about their services, go to https://keyrenterpmc.com/ or send them an email at [email protected].

Episode Transcript

Intro 0:05

Welcome to The Same Day Podcast where we discuss driving incremental business growth and other topics related to real estate, property management and entrepreneurship. Now to the show at hand.

Mat Zalk 0:20

Mat Zalk here I’m the host of The Same Day Podcast where I connect with top business experts and real estate leaders. Past guests include Aaron Wynn owner and operator of Wynn Plumbing in Oklahoma City, Jared Goldfarb, the Senior Vice President of Commercial Lending at BancFirst here in Tulsa, and Brandon Neth, the Co-founder of Evergreen Properties also right here in Tulsa. Today’s episode is brought to you by Keyrenter Property Management. At Keyrenter Property Management, we are a full service property management business, helping our clients buy renovate and operate real estate assets. We help our clients build wealth while taking the headache out of property management. And you know, since you do this all the time, but lining up contractors to get to make ready done in a reasonable amount of time. After a tenant leaves a property can be very difficult, let alone some of the renovation work that you do in your business. Contractors are busy the work seems to drag on forever and all that leads to lost rental income but a key renter, we line up our dedicated vendors so that turns can happen super quickly and we get more money back into the pockets of our owners as you do the pockets of your investors. But that’s why you no matter what rentals you have single family homes, condos, townhomes apartments, we have the management solution that you need, go to keyrenterpmc.com or email us at [email protected]. Today’s guest is Kenneth Gee. And he’s lived multiple lives. His first career was in banking. He was a commercial lender at National City Bank, which was later acquired by PNC. His second career was as a tax manager, Deloitte and Touche and his third career was in forming KRI Partners and in between, as you’ll hear, there was another little career as well. Kenneth has more than 24 years of significant real estate banking, private equity transactions and principal investing experience. He’s been involved in more than $2 billion in transaction value throughout his career. He also owned and operated several Cessna certified Cessna pilot centers in Northeast Ohio, the in the Northeast Ohio area, which I guess is a spoiler to what I was referring to earlier. And you should visit kripartners.com for a whole host of informative podcasts about multifamily investing. There’s also introductory webinars that walk you through underwriting deals if you’re considering doing this on your own or being your own GP or forming a GP for syndicated deal. And then it also there’s also stuff on making real estate work for you and your lifestyle, and a ton of other great information. Ken Gee. Welcome to the show. Happy to have you on.

Kenneth Gee 2:43

Thanks for having me, Mat. Appreciate it.

Mat Zalk 2:45

So you’ve lived like multiple lives. You’ve had a career as a commercial banker, you’ve had a career as a tax professional. You’ve done some private equity transactions and principal investing. And then you’ve got KRI. I would love to know the history of how you have lived multiple how we will we should all live multiple lives, but how you live your multiple lives and how you ended up founding KRI Partners.

Kenneth Gee 3:07

Yeah,so that’s a great question. So I’ll give you the history brief. I grew up in Toledo, Ohio, got my undergrad from University of Toledo die and moved to Cleveland and became a commercial lender for five years while I went to school at night at Case Western Reserve to get my graduate degree. I got sick and tired of my clients at the bank saying well let me talk to my CPA. Let me talk to my CPA. I’m like, Man, I want you to talk to me. All right. All right. I’m gonna go be a CPA. But you know what, school at night, got the got the degree, went to work for Deloitte for seven years. And did tons of fun stuff. Like you talked about a lot of private equity work, m&a work, transaction planning, I mean, a little bit of the compliance stuff, but it was fun. on the tax side, it was it was fun. It’s fun, could be as a CPA. Well, then, of course, things changed. Right? I had a very, very young family. I used to do my daughter’s feeding in the middle of the night. And I thought it was cool, because it’s father daughter time, until I realized the sucks. Three o’clock in the morning is the best I could do for my daughter that that really made me realize, man, you What did you just do? Like he thought you did everything right. But you what you really did is now you bury yourself in a job that delay is not a bad place. Don’t get me wrong, but you work 70, 80 hours a week as a CPA. That’s rough stuff. And I didn’t want my family to grow up without me being around, right? I’d be working all the time. So I said alright, I gotta figure it out. Now. Well, when I was at Deloitte that practice and the Cleveland practice had it was huge real estate practice huge so I had you know, all the big companies Jacobs and Zaremba and developers verse I’d every every one of those companies seemed like they bought started in Cleveland, or a city prior to that. So but what you did is you got to the see, I can’t give details but you can see those people made a lot of money again, I need to do this. I need to figure it out. So it took me a long time but about three deals in Cleveland, small deals, 28, 24, 22 units, sold them have about three years later made half a million dollars. And I did I said, Oh my god, this is it. I just made more on side than I did while I was at Deloitte. Right. Like this is silly. So that is what you know, I made, you know, I got frustrated and how I hear this story, by the way, a lot. A lot of people get frustrated with that experience, because they they want to hang with their families. So I figured it out. I thought real estate would do it. Now. I proved it would it would work. And so then I just ended up leaving delay in 2001 and great terms and just never looked back. I just kept doing deal after deal after deal.

Mat Zalk 5:40

I mean, it’s clear from that story, that you’re no stranger to hard work, you’re putting in 60, 70 hours at Deloitte, you’re over the course of I presume a couple of years, you buy three separate multifamily deals. How do you find in the early days now is that was different. There are a lot more eyes on multifamily deals? Certainly, how did you find those deals in the early days and find 22, 24, 26 unit deals.

Kenneth Gee 6:02

I’m gonna totally date myself. But my first deal I found was an ad in the newspaper love that. They don’t even print most of them anymore. So I responded to an ad and it happened to have been a property owned by a really big owner in Cleveland. And he was a super nice guy. As it turns out, I couldn’t have picked a better seller with more integrity. He was a great guy. And it turns out seven years before he bought that property as his first big deal. Now he owns like 10,000 units, right? He’s a big guy. But I bought that I responded to and I had, you know, I he could have just destroyed me because I would have been so clueless, and I wouldn’t have even known it was happening. But he’s an honest guy helped me get financing took back a note. And then the second deal. I was like, Okay, this is starting to work for me. So I just literally hounded everybody up and down the street. Southie sell me a building. So if you’re building finally talk to one guy into it. And then the third deal I bought from the Development Corp. So you know, you probably know every deal has a story. Yeah. But that’s kind of how it started.

Mat Zalk 7:06

What were the underwriting mistakes that you made on those first three deals that you never made again?

Kenneth Gee 7:11

I had I was clueless. I mean, I didn’t understand underwriting the biggest, what I say I had a really honest seller. I really had an honest seller. And the lender knew him. And you know, that’s how I found the lender. I mean, he really kind of teed this thing up for me, and I made money on it right? He wasn’t you know, he’s on Sky isn’t a dog. I won’t name his last name. Super nice guy. To this day I haven’t talked to in a long time. But the real mistake I made on that first deal. And this is you know, this deal. This stuff can get scary. If you don’t know what you’re doing once I bought the deal. I remember I’d been a commercial lender. So I understood credit and application. I understood all that stuff. So the person that was on site was sending me the credit appetito the applications that she was getting, I’d run the credit report. Terrible credit evictions. I’m like, oh my god, what am I gonna do? How am I gonna let these people in? Now I got this building and I can’t find good people to live in it. Yeah, I was. The rents were for 15 a month back then. And so I met this wonderful lady named Karen. She’s she, you know, toured the property with me. She’s like, can you gotta fix this place up, man? I mean, the kitchens were from 1930s. I mean, have you ever seen a 1930s kitchen?

Mat Zalk 8:26

That’s the kitchen faucets coming out of a wall instead of.

Kenneth Gee 8:30

The molded porcelain sinks and yeah, the dry. Oh, yeah.

Mat Zalk 8:33

That looks tell me that look is coming back in style.

Kenneth Gee 8:36

I know. It’s everything was bad. Yeah. If I would have just waited I probably could have been worse. But you said Ken, I’m telling you. You gotta you gotta sign up these floors. You got to sand the floors. You got to it was hardwood floors. They’re beautiful. Yeah. And he’s like, it’ll cost you about five grand and I looked at it. I’m like, Are you out of your mind? decide to spend every last penny I had just to buy this place. And now you want me to spend five grand? She goes, Look, I’m just telling you, you’re gonna have to do it. If you build it, they will come on like, okay, so I borrow that money back or you renovate a one unit. She wasn’t wrong. I made it nice, beautiful hardwood floors, newer kitchen, you know, did light fixtures, all the stuff that you would know for sure you and I rent done the first app we got was from a Case Western Reserve graduate student. Ding Ding Dang, I’m wrong this way. And guess what my rents were.

Mat Zalk 9:29

25 599.

Kenneth Gee 9:31

This is back in 1997. What I took around from 415 to five nine. And so the lesson there was actually a bunch of them. First of all, don’t buy these things without knowing what you’re going to do with them. Right. I was really fortunate early on just did some stupid things and didn’t understand. But the other thing I learned from that was you can actually have your rent to low. Yeah, because when you Oh, okay, good. People won’t even look at them because they’ll think oh, that’s way low. It must be a dump. Sure. And that’s what they think. And as soon as you know, I probably could have spent less than raise the rent, they probably wouldn’t at least because it still didn’t look that nice. But I would have attracted more, you know, better quality tenants to apply. So those are a couple of lessons that I learned on that first deal.

Mat Zalk 10:17

What’s the most important factor you consider now in underwriting a deal.

Kenneth Gee 10:22

That the numbers have to work. You can’t lie to yourself. I mean, I’m being a CPA commercial lender. You know, we have underwriting programs that we help people figure out how to underwrite it, you got to you got to know the numbers, you just have to, and don’t, don’t kid yourself, don’t let two brokers talk you into this and that you’re not buying next year’s numbers, you’re buying today’s numbers. And what I find happen now that you know, 26, 27 years later, we’re helping people get into this business. And you see them when they don’t really understand the numbers they don’t know. Right? They’re unsure, they’re not sure what they should or could do. As soon as you teach them the numbers and they really dive in. They’re like, Oh, no, no, no, Mr. Broker, I can’t pay any more. And here’s why. And now their confidence level goes through the roof. So that’s why I think numbers are the most important. Mark, it’s important neighborhoods report, all that stuff is is too. But if you can’t figure out the numbers, you’re not going to do well, in this business.

Mat Zalk 11:16

I mean, brokers are essential. They’re the ones that make the deal happen, and they push things through, but I look at a t 12. A T 24. T 36. And they chose increasing insurance costs every year. And then people come and go, yeah, the broker said that I could get a better deal on my insurance, and that that cost would go down from you know, $400 a year per unit to 250. It’s like, what why would you look at the historical Why would you think that I mean, the loss ratio that a loss runs or whatever what they are, insurance is going to underwrite it differently, maybe because you haven’t had a loss on your record, but the property, you know, how to fire two years ago, how are you expecting that things are gonna go down? And then you know, it causes all sorts of confusion when they get into the property and insurance prices go from 400 to 500? Oh, my numbers don’t work anymore. Well, you shouldn’t have believed the broker when they sold your goods. Well, you’re exactly right. And stuff. Tell me you’re a big multifamily guy. You like multifamily, you syndicate multifamily deals? What is it about multifamily investing that makes it more profitable or attractive than scattered site? Single family, for example?

Kenneth Gee 12:19

Yeah, that’s a good. So I’ll take it back to the decision I made in 9695 when I was trying to figure this out, and 97. So I couldn’t figure out how to run that. Well. Remember, I was at Deloitte at the time. Yeah, there was no way I was going to go to the property and show apartments. I couldn’t fix anything to save my life. So I had to have a property big enough that I could have somebody there. Yeah, so 28 units seemed big at the time, and it was alright. But I could afford to have a wonderful lady. Her name was Joyce Thompson, she is no longer with us. So I’ll say her full name. She was an amazing lady. She didn’t drive. She didn’t want to drive, everything she needed was nearby. And she was kind of the little, little mayor of the complex. She showed the apartment, she helped coordinate maintenance, she did everything. That was the real reason that I’ve never actually bought a single family for investment purposes, because I couldn’t. The other reason now that I’ve matured more, that I really like some level of predictability in valuation, right? Multifamily is valued based on its ability to generate cash flow. Now, there’s a lot of other factors, but it stands to reason that if I can improve cash flow, there’s at least a pretty good chance someone’s gonna would be willing to pay me more than I paid. So I like that predictability. Right. I liked that. intentionality, right. We forced the appreciation, that’s what we call it.

Mat Zalk 13:42

So you’re talking about an NOI multiple, a cap rate, in essence?

Kenneth Gee 13:48

Well, no, we’re talking about improving the cash flow. So if you leave cap rates steady, right, if they don’t change your.

Mat Zalk 13:55

improves that aesthetic cap rate, and you have more more value on If your NOI the property.

Kenneth Gee 13:59

That’s right. That’s right. Yep. Yep. Or if expenses go up, that cash flow protects you, because you have more cash flow to pay those higher expenses.

Mat Zalk 14:08

Right. Right. So what do you do to improve cash flow?

Kenneth Gee 14:11

We were evaluated. So we’ll go in now it’s gonna depend on the property. Sometimes it just needs management and a little bit of TLC. We bought a property in Winter Haven, Florida. We’ve owned it for seven or eight years. Our renovation budget was 50 grand, it was ridiculous. Wow, super. We’ve moved rent $625 a month in those eight years. That’s a lot. That’s an insane amount of money. We’ve reified returned everybody’s money, another 100%. I mean, they’re just their love and life. Other properties we buy, they need three and a half million dollars for the renovation work because they’re rundown, they’re not nice. And so somehow, we’re adding value to that property, either. It’s through physical improvements or management improvements. Usually it’s both. But as you can see that that’s a pretty wide spectrum there. or it just depends on what that property needs, you wouldn’t be surprised at how many properties are actually operating under where they really should be in terms of their rent structure. It defies logic, because most people will say, Well, of course, the guy is going to maximize rents. But they don’t always do that.

Mat Zalk 15:15

I guess it stands to reason that if you’re going to maximize rents, people are going to have higher expectations. You don’t want to go in and fix things properly, or you go at the maintenance, defer, and all sorts of other stuff. So you say I’d rather have lower cashflow, and not have the headache. But somebody like you comes in and says, I’ve got the systems to manage the headache, I’ve got the systems to do the improvements. Therefore, I’ll demand better tenants, I will give them better service and then in exchange, I’ll capture that upside value.

Kenneth Gee 15:38

That’s right. Yep. If what we usually do is we leave some for the next guy or gal and I’ll that’s critical to your business plan. Because the next person has to have a reason to buy it. If you if you eke out every penny now you’ve just, it doesn’t mean you can’t sell it, it just means your buyer pool is really strong. Because you leave a little bit of meat on the bone, you have to be how does that look like you? How does that look? You you you renovate 40 or 50 units and you are 15 or 40. And you and you you know prove the concept and instead of the the next person do the work and capture the cycle? There you go. Yep, yeah, if I have the perfect business plan, I’ll go through the exterior. Common areas amenities. I love improving amenities. I love it. I love it, because it helps us tell the leasing story that grabs people, and then do some of the units and then sell it. That’s what we prefer to do.

Mat Zalk 16:26

And when you’re when you’re thinking about amenity improvements, though, how do you know whether to put in a dog park or pickleball? Court? What’s fad? What’s not what’s really going to drive value? Is it a gym? Is it a cold plunge hot tub? Like how do you how do you assess that?

Kenneth Gee 16:42

Yeah, yeah, that’s a good question. I mean, you’re gonna start with what what the property definitely needs. What’s really important to me is so you’re going to do different things in different properties. We just closed on a brand new property and St. Pete 102 units. Well, what we’re going to do there is we’re just going to finish off the, the feeling of making that a resort property right, the way it is situated, you know, we’re going to add some AV some outdoor TV and, you know, a few more things and spruce up some landscaping and that place will feel like a Disney Resort. Right? That’s the plan there. But now another property. You know, if it’s a B class property that could be different. What I want is the amenity I want to give our leasing people something to walk out and say, okay, here is here’s what you have when you live here. You got now I tell him to paint a picture you got Dad’s watching a football game and the outdoor TV where the kids are in the pool right next to a mom’s working out. It’s lunchtime mom or dad goes and cooks on the outdoor grill, which is also right there. Y’all sit at the table at the pool, then you flip it around, maybe Maybe Dad goes and works out whatever. You see what I mean. Now I’m putting them in that amenity experience. And then we go from there, right? Because a lot of people have dogs. Well, maybe the dog park could be located right next to because now you brought the dog with you because kids always want the dog with them. You see how I’m trying to I’m in? Where do I apply? That’s exactly right. And that’s what we do. Because guess what you can’t do? You can’t put all that in a single family home unless you’re rich. Yeah. So that’s how we pick our amenities. Just we want that experience for them.

Mat Zalk 18:20

When you when you’ve done this, I presume you bought through COVID and have been Yeah. Before and after. How do you How did you derisk some of the renovations at the multifamily properties? The real cost escalation, the the wrong amenities. How do you de risk some of that stuff?

Kenneth Gee 18:39

We haven’t, what usually happens is we so what we do is we go through our renovation plan, we leave the least. How do I word this? The least critical ones for last right? You you prioritize these things, which one will have the biggest impact of value? So if you do start because his renovation process might take maybe up to a year, maybe more? And if costs get away from you, then you just drop off the bottom of the of the list, right? Okay. Yeah, it sucks that we can’t do it, but it really didn’t change. Well guess what? That becomes part of the meat for the next guy that’s still on the bone. So that’s how we do that and how we I mean, that’s how we manage it. We’re always and this is this is a mistake I see a lot of people make, especially when they’re new. They go into it, they tell their their investors, this is what we’re gonna do. We’re gonna do XYZ and ABC and we’re gonna paint this green and that read, and then they get into it. And they will not change that plan no matter what. Yeah, and that I watched him do it and it kills him. Because once you get into that property, you just know so much more when it’s yours. There’s nobody hiding things under you know, under the rug. Now you really see what’s going on. You need to be prepared to constantly evaluate that plan and change it. Right. New people are afraid that their investors will think they don’t know what they’re doing. But the reality of it is, that is what you’re supposed to do you Gotta change when you learn when the facts of the situation change. You have to change what you do.

Mat Zalk 20:06

And when you manage in a year in Cleveland, you’re managing in Florida. How do you manage that? geographic disparity your Yeah. timezone is it?

Kenneth Gee 20:24

Yeah, yeah. Oh, yeah. It’s a two hour plane ride. Right. And I have really, but we have 35, 40 employees, or regional managers are very good. Yeah. And look after, you know, I don’t need to be there every week. I just don’t because the numbers don’t lie. Right. If rents are, you know, you vacancies, you have, to me, there’s a lot of telltale signs if you’ve been doing this a while, you know, hey, there’s a problem. I gotta go figure it out. Right. So, you know, there was a time when I spent more time on the ground, helping our regionals figure that stuff out, they’ve just matured to the point where you know, they are ahead of it, right? We’re always looking 90 days ahead in this business, they try to head things off before they become a problem. So it’s really not hard. I mean, who’s gonna argue it’s lying to ya?

Mat Zalk 21:11

Place like winter place called Winter Haven.

Kenneth Gee 21:14

Yeah. It’s in Central Florida. I don’t know if you know where it is. But it’s a small town in central Florida. And man, it just because everything from the coast command comes in from the east of the West, and from the south. It all meets in that general area, and then goes up to the southeast. So it is a big, really growing area. It’s really crazy.

Mat Zalk 21:37

Do you see the same seasonality that we would see in Oklahoma, for example, that leases are popping in summer and dead in winter? Or do you see a little bit?

Kenneth Gee 21:45

It’s not as bad though. Yeah, November and December? Sometimes a little bit of January are the worst. Yeah, but nobody wants to move around the holidays doesn’t matter where they are. But it’s not nearly I mean, in Cleveland, man in February, there ain’t nobody going outside. And it just sucked. Yeah. And so no, we don’t see that kind of stuff there. In Florida. We’re complaining because it’s 50 degrees.

Mat Zalk 22:06

Cold circles.

Kenneth Gee 22:08

That’s what they do. I make fun of them all the time.

Mat Zalk 22:12

So when, when a potential limited partner is investigating different firms that they could partner with, I guess, in syndicated real estate deals. How do you differentiate KRI Partners? What do you think that a potential LP should look for in the investments that they’re gonna make and the firm’s that they’re gonna make and then how do you? How do you say yes or no to a potential LP?

Kenneth Gee 22:34

Yeah, those so you’ve actually, you don’t realize that, but you just hit my hot button. Because I’ve been doing this a long time. And I watch people, some do well, some not do well, when they make their investment decisions. I’ve figured I’ve come up with four rules that I want potential investors to follow. The first one is they need to invest with somebody with experience. It seems obvious, but the experience is important. I didn’t know Kobo was coming. I didn’t know, hyperinflation, I didn’t know 500% increase in interest rates. So you need a management team that has enough experience to hopefully through multiple cycles. Yeah, they can figure out how to deal with it, then they need a track record. And you think well, can those are the same, but they’re not the track record. That’s critical. Because you need to have somebody that’s gone full cycle with deals, you can buy all the deals you want. The question is, could you sell them and make money, right? So we’ve, we’ve sold 14 of our 19 deals, and made money, right? So we’ve proven we’ve done this, we know what to do, we’ve taken the full cycle. And that’s critical. The third rule is that I want people to make sure that whoever they’re investing with is transparent. To give you an idea, if you go to our website care, I partners.com, you’ll see our entire track record, we hired a company called bear Avast, to vet the whole entire track record. I mean, it was ugly, because it was 25 years of stuff, right settlement statements, tax returns bank statements. I mean, it was no fun. It was very expensive. But it was really important to me that when I said, Hey, man, here’s my track record, you’re like, Okay, how do I know these are true? Well, somebody’s already looked under the hood, right? That’s transparency. Nobody likes to do that. But I think it’s important, if I’m gonna ask you to give me 100 grand, you need to know what’s really going on here. And then the last thing, you need to make sure that firms are going to put you first as the investor. And the only way to figure that out is to look at the terms of the deal. And just ask yourself, is it possible for that sponsor to get do really well in a deal and you not? That’s the only way you got to keep that question in front of you. As you look through the PPM and put in things like that.

Mat Zalk 24:35

And what would what would trigger you what would trigger the thought, oh, this, this GP can get rich when I’m not getting.

Kenneth Gee 24:42

A lot of fees, a lot of fees, a lot of phases. The first thing things like especially allocating depreciation back to themselves and not to everybody in the deal, they do it.

Mat Zalk 24:52

I didn’t even know you could do that. I thought it had to go period pursued ownership.

Kenneth Gee 24:56

Now now with partnerships you can do it a special allocation you’d want with one ownerships. Wow, yeah. Wow. So there’s a bunch of closing and a follow. Okay, there’s a bunch of rules. But generally, if I wanted to allocate all the depreciation back to me, I could make that as the term of my deal. I don’t think that’s fair. But hey, some people do it. I mean that you asked me for a couple of examples. Yeah. But now the last part of your question, I think it’s also important because if you’re the syndicator, or we do blind pool funds, not where we’ve done syndications, but we prefer to raise the money first now.

Mat Zalk 25:28

Oh blindfold fund means you’re giving me 100 grand, I’m gonna go and I’m gonna allocate that in a deal. But you don’t know what that deal is yet?

Kenneth Gee 25:35

Yes. That’s the way private equity really works. Yeah, right through private equity. So syndication, remember, you go find the deal, you lock it up, and then go raise the money. Well, if you’ve ever gone through that experience, it’s horrible. Because you got a very short amount of time to raise a whole lot of money. Sure, well, and you’re like in Florida, when there’s 20 offers on the same deal. They’re all indicators. Just a broker, I promise, I’ll raise the money. I know I can, I promise, I promise. Well, now, a few years ago, we said, Wait a minute, I’m tired of being just another syndicator. And paying up to differentiate. I said, Let’s go raise the money first. I mean, I’ve done it before, by watching them diluted Deloitte for years, said, Let’s go raise the money. Now I’ve got a track record so they can see what I’ve done. I’m going to do the same thing now. And so now we have all this capital raised. Now you go to the broker, and say, Mr. Florida broker, I’ve raised 15 million bucks. Any deals, you want to see people work hard, they will work very hard? Because they know now that whole risk is off the table. Right? It’s huge. Yeah, it’s huge. It’s harder to raise the money, because they’re, they’re trusting me, but they’re trusting me anyway. They just don’t think of it that way. Right. And a syndication you get to see the building first. Yeah.

Mat Zalk 26:46

Yeah, but I guess that changes the terms a little bit that you’re raising the money in January, you don’t find a deal till March? Are you paying your pref on.

Kenneth Gee 26:56

Now we just don’t hear all the capital, we just don’t call it you know, call the capital. Okay, fine. Yeah, cuz otherwise, well, I can call the capital. So here’s what I would do, we may do this on our next fund. If I do, it’s gonna go in an interest bearing account that I can’t touch and whatever interest is earned on that account, will do a data calculation of paid out to all the investors. So they’re not worse off God, right? Because it just makes you an even stronger buyer. And what you want to do, especially in hyper competitive markets, like Florida, you you need to be as strong as you can be. There’s, Sir, here’s my bank account. Don’t I don’t even have to call the capital. It’s here, Sian, and it means a lot. Now, I do want to get to the last piece of that question, though, because I think it’s really important, because nobody thinks about this. When we talk to investors, they’re asking me questions that you know that that’s all good. But I it’s really important to me that I understand what they’re trying to do. Because I don’t want them to have an expectation that this is a liquid investment, that I can get them out for sure. In three years. I can’t do that. So we actually, I don’t want to call it vet, but we kind of vet the investors, because I’m looking for I’m looking for synergies, right, I want to make sure we match, and that you’re not trying to do one thing. And I’m trying to do another with the investment because we know that’s not gonna end well. So that’s, that’s I just wanted to answer that last part of your question.

Mat Zalk 28:11

Yeah. So you want to make sure that time horizons are are known, it could be three years and it could be seven years, we don’t we’re gonna get out.

Kenneth Gee 28:19

Because here’s the deal in our business, if as long as you don’t lose a property, usually you just have to wait out anything is that tough in the market? You just need time. Just don’t don’t over leverage the property, you won’t lose it. And you’ll you’ll probably be fine. But you need an investor that understands that that’s a possibility. And that’s what we tried to do.

Mat Zalk 28:37

Speaking of over leveraging your property what’s what’s a comfortable range of debt to asset value in your mind?

Kenneth Gee 28:43

Right now? We’re at about 60, 65, maybe 70? I haven’t done 70 in a while. But it’s 60, 65.

Mat Zalk 28:50

Even when interest rates were lower your bet 65.

Kenneth Gee 28:53

We did a bridge loan that was more but we got we took we paid that out quickly after like 11 months. Yeah, yeah. I don’t like variable rate debt. Remember, I lived through? Oh, 809. Yeah. And so I know what ugly looks like in the debt market. So we’re really careful about managing our debt.

Mat Zalk 29:10

Yeah. Do you? Where do you manage as it all in Florida, everything in requiring now?

Kenneth Gee 29:15

Right now? Yeah, we’re, we’ll go anywhere in the southeast. We’re in the process of, you know, continuing to grow. I’m just slow and deliberate. You know, I’m not going to just call it jab. I’m not going to go find a deal in one market and we’ll find a deal in another market. Right. That’s not how you make money.

Mat Zalk 29:31

That’s business. Yeah. How far geographically do you spread in Florida? And are you able to take advantage of synergies property managers, maintenance teams, that sort of thing between property?

Kenneth Gee 29:40

Yeah, a little bit. I mean, we’re in Tallahassee, we’ve been in Jacksonville, we’re in Daytona. We’re in Winter Haven, which is Central Florida, Tampa, St. Pete Bradenton. So we’re kind of markets all over I mean, it’s a big area, but it’s, it’s not that hard.

Mat Zalk 29:55

And are you are you making a decision between cashflow on properties and potential appreciation or is it all you underwrite for solid cash flow?

Kenneth Gee 30:03

We do both. Yeah. So the reality of this business is, well, now in the markets that we’re in, we need some cash flow, because you should be paid to turn, you know, give us your money. We’re looking anywhere from four to 6%, is what we’re looking for. And then but but the real money in this business is in the appreciation, right? We grow the cash flow. So cash flow is minor, but it’s really not it actually drives the whole bus. It’s kind of weird when you think about it, is that cash flow improves, improves the value? And so you’re if you’re, if you’re leveraged 40 to 60, right? If you’re, if you’re 60% leverage, you know, just if you did the math on 100 unit property, and you turn if you raise rents a couple 100 bucks a month over a five year period. That’s that’s basically a double on your equity. Yeah. If you do all the math, I won’t do it for you here.

Mat Zalk 30:54

But that’s that’s the that’s the argument in favor of levering up as high as possible.

Kenneth Gee 30:59

Yeah, but I wouldn’t want to lose the profit. I wouldn’t call 60% over leveraging, right. I don’t want to.

Mat Zalk 31:07

Yeah, I mean, I do single family, not multifamily, different, different worlds, certainly. But I’m like, and I argue with my business partners on this stuff, when we buy in partnerships, like I want to be at 100% debt to equity, I want to be like all the way up. And then I want to buy as many properties as possible. So that you’re talking about the cash flow smoothing over time is a cash flow is smoothed over multiple properties that if one is vacant, you have you pay from another, but then your return on equity looks really, really good. Because your denominator is zero, then your numerator is infinite, then the equation is infinite. But you can easily get over leveraged and if markets turn boom, and the problem with with my generation of investors that we’ve never seen a significant downturn in the market. So were you guys have more wisdom, your generation and you’re only a few years older than me, probably but your Your generation has more wisdom and has seen more cycle than our generation. So we get a lot of very, very aggressive investors in my generation.

Kenneth Gee 31:58

Yeah, no, you are. You’re right. Yeah, you’re right about that.

Mat Zalk 32:03

So you, you talked about the catalyzing event in your investment journey, or your business, your career journey, and that was feeding your daughter at three o’clock in the morning. For those that are looking to start their investment journey. They are a little bit afraid to put their cash to work or they liked the stock market when the stock markets in a good return over the last year or so. Whatever, but they maybe don’t want the variability of the day to day and Cling Cling to their, you know, iPhone to check the variability of the daily markets. Yeah, like, if they don’t have a catalyzing moment that that you know, springs them into action. What do you how do you encourage them to start investing?

Kenneth Gee 32:40

Yeah, I mean, it has to come from within them, right? They have to have a reason that that catalyzing event that you called it, something has to happen to them, right? And for me, it was just I didn’t want I didn’t want to miss as it turned out. My daughter played AAU basketball, I traveled all over the eastern half of the country and her stupid AAU games, right? That’s all right. My son played baseball, he’s a pitcher, I would have missed all that crap, right? That for me, that’s what it was the other catalyzing event for a lot of people. And I talked to a lot of people getting into this business because we have a whole investor education side of our business. And so their frustration is similar to mine, they want they want to take control your life. The other number one person is somebody that flips houses. And they they make money doing it, but now they want to grow long term wealth. So that’s how they flipped into the multifamily. Most people. Well, the third bucket let me say the third bucket is people who they’re doing well. But if they wanted to go charter yacht for 50 grand for a week, they probably can’t figure out a really a way to justify that that will be painful, right? Well, see now I’d rather be in charge of my own financial future. I really would. So that if I screw it up, it’s on me. Right? I was always definitely worried because I’m not really good at corporate politics. I’m just not so good. That right? That if you frustrate the wrong person, basically, if you piss off the wrong guy or gal, your career can be stopped. You don’t even realize that you’re still working like a dog, and you’re not going anywhere. And that really, really worried me. So I would that’s a big part of it for a lot of people. You know, they’ll get canned, they’ll see their friend get canned and they’ve been there for 15 years.

Mat Zalk 34:23

That’s a catalyzing event.

Kenneth Gee 34:24

That is I mean, there’s a lot of things. There’s a lot of things that that happened to people, most of the here’s the thing that most people don’t realize, they think it’s a scary thing. And sometimes it is, but they think they need to quit a in order to do B. And you don’t need to do that in real estate. I didn’t do it. My first three buildings, I still worked at Deloitte. I mean, that was a lot of demands on my time, but I could do it a little bit at a time. That’s what’s really nice about real estate. You don’t have to go out and buy 800 units at once, right even if you Could you can buy a 20 sweeter and then buy a 30 sweeter? Do this thing slowly so that you kind of ease your way into it. That’s how I encourage most people to do it. Because what if this, you’re not gonna get rich in real estate overnight? Maybe you do. I don’t. It’s just takes time. But man, when it stacks up, man, it this this, this graph is just, it just climbs very quickly, you just have to give it time to do that.

Mat Zalk 35:24

Yeah. And even that, I mean, your story was one where you were, you were the GP from the beginning. But if somebody has 2550 $100,000 that they want to put to work, they don’t have to even work on the weekends, they just send you a check, and they’re done. But they do. My question to you is what’s what, what sort of cheque sizes do you generally accept from your LPs?

Kenneth Gee 35:43

Yeah, usually the minimum is 100. It’s usually somewhere between 100 and a million, the average is probably close to 250, something like that I calculated the elaborate on the last one.

Mat Zalk 35:54

So really, just as an investor is betting you and you say that one of the criteria is that they be that investment partner they’re going to choose has some experience and a track record. Sounds like the average investor might also have some sort of track record, they might have joined some of their friends and doing a smaller deal and cut 25 or $50,000 checks by the time they get to you in there ready to cut $100,000 Check. They may be cashing out the 401k and self directed or they may be they may cash out a regular stock portfolio and cut your check. But they may also have invested in other things and not be totally green.

Kenneth Gee 36:24

No, you’re right, you’re right about that we have a lot of when when we talk to a partner or potential investors, I always encourage them, look, if you haven’t done this before, I want you to pick two or three depends on how much money you have. Put a little bit with us a little bit with somebody else a little bit with somebody else. And then don’t Don’t, don’t spend it all. But do that and watch and sit back and experience this thing. Right? And you’re gonna you’re gonna very quickly figure out wow, I like what these guys are doing. Wait a minute, these guys haven’t even called me since I wrote the check what the hell, right? I haven’t heard from them, they don’t return my call, that stuff goes on in this business. So that’s why I want people to kind of feel their way around and follow those four rules. If I see these investments go wrong. It’s because they broke one of those four rules. They just do almost every single time. And usually it’s more than one. And it’s because they get FOMO they their fear of missing out. They’re like, Man, I gotta get in. I gotta get in. You know, now we’ll let people in for less, if that’s what it means. Because I don’t Here’s my message. Matt, if you’re going to invest with me, I do not want you laying a bed in bed at Wake at night. Kind of having investor remorse, right? We have no way to I want that. I would rather have you in at a number that you’re really comfortable with. And there’ll be another deal. Just Just chill, let’s let’s do this the right way is I’m not transactional, I want you around for the long term. And most of our people do stick around. Interesting is the right way to treat people. That’s what you should do with people right? The way people, don’t do that.

Mat Zalk 37:52

I wouldn’t say a perfect deal. But in an average deal. Once an investor writes you a check, I stroke that cheque and they mail it off to you they ACH and wire it to you or whatever. How often should they expect to hear from you?

Kenneth Gee 38:05

Yeah, so first of all, we are updating them regularly through the portal. So at a minimum, like a deal, like the deal that I talked about, everybody’s got their money back and all that they are from it’s quarterly, I send them statements if they call me that, they’ll have my cell phone number. I call him back. There’s no reason not to. They can email me anytime they have questions. They’ll even Hey, I’m they’re always everybody vacations in Florida. Hey, I’m on vacation, my wife, can we swing by the property? I wouldn’t want to go. The manager show you around. We’re totally cool with that. That’s what you should do.

Mat Zalk 38:35

People want to see the assets they’ve invested in. Yeah, and they want to be proud.

Kenneth Gee 38:39

Right? They want to they want to be able to show their wife, their kids their family. Yeah. Look, what we what we own part of this. You know, that’s a cool thing. It is cool. Yeah. So yeah, you want to at least talk to them quarterly. And we said them, you know, we usually as four to 6% is the cash flow distribution. And we send that quarterly along with we send them a p&l a balance sheet, the rent roll, and then we write up a narrative on each property, what’s going on, right? It just depends on the property. We were in the middle of renovations, whatever. We’re thinking about putting it on the market. And here’s what we’re thinking and here’s why, you know, whatever it is, that’s going on, we want them to know about it.

Mat Zalk 39:18

Yeah. A big portion of your website, kripartners.com is devoted to education for the growth and betterment of potential investors, investors, people that are syndicating how to underwrite deals, how real estate fits in your life, etc. What do you do to continue your personal and business development?

Kenneth Gee 39:33

Oh, I I just go I’m constantly learning. I’m constantly reading. I’m gonna I’m trying to put myself around people who have even gone further than I have in this business and in other businesses. That’s really important, right? Because I mean, apartments or business what I’m doing is a business right? So every you know, I it whatever business you’re in, I’m sure I could learn a lot from you. Right. I know what you do. But my point is, if you On a law firm or your physician, I’m still learning from you. So I just tried to put myself around people that I can learn from and you’re going to learn from everybody all the time. You just will.

Mat Zalk 40:13

Yeah. Can we touch for one second last question. I want to know a little bit about your Cessna pilot centers in Northeast Ohio. I’m a pilot. I love general aviation. Are you a pilot?

Kenneth Gee 40:22

I was an I am a once you’re a pilot, you’re always a pilot. I’m not current. So yeah. So when I was at dually, because I didn’t have enough to do. I wanted to learn to fly. And so the key tower was where the building or my office was. Less than half of my wait was Burke Lakefront Airport. And so I thought, you know, I want to learn how to fly. During my lunch hour, I would go to the airport and learn to fly. And, and it they had one new Cessna 172 R if that means anything to you, basically underpowered 172, but it was the only brand new airplane, I mean, I ain’t flying it anything but that plane, right? They have all this other stuff.

Mat Zalk 41:01

What year is this? 99?

Kenneth Gee 41:03

it was right around there. Yeah, probably.

Mat Zalk 41:07

You’re flying an old six pack. There was no there was no Garmin G 1000.

Kenneth Gee 41:13

Oh I had team gauges. Yes. Yeah, they were just coming out with a glass stuff. Yeah. Cool. So I thought and all the other planes that were old shag carpet. I mean, you know, nothing worked in them. Right.

Mat Zalk 41:25

I mean, 172 armies that it was retractable?

Kenneth Gee 41:29

No. It was they have an RNN and ask the R this. They’ll know that the R had 160 horsepower engine, the s at 180. Okay. Matter. It mattered a lot and performance right. Yeah. So. So I thought, so I learned to fly there. The funny thing is, I’m blind in my left eye. So monocular vision, right? I can see okay, but there’s different rules, right? So I got my pilot’s license passed a medical did everything. The full checkride done. I got a letter from the FAA. You get to fly with one of our medical examiner’s I’m like, Dude, I already had a pair. You’re flying with an examiner. So I got the benefit of two check rides. Not just one, but two. That’s extra safety. That’s right. That’s right. So I remember we’re on short final, he pulls back the the throttle. He’s like, Okay, you have an engine out. And by the way, what does that sign say over there on the freeway? Because there’s a freeway right next to the airport. So I’m reading the same short Fine, I’ll try not to stop. And then he says, Alright, you see that plane up there? And you say, I don’t see a plane, man. There’s a plane there. I don’t see it. I guess I’m gonna fail. He goes good, because I wanted to see if you were gonna lie to me and asked me you did? Yeah. Oh, my man here at Da orrible man sly fox as I pass that. So then I thought, Man, this is cool. This was really cool. But you’re downtown Cleveland, the time downtown Cleveland was kind of thriving. And people would love to come down here and fly. Right. And the people that have the money are there. Yeah. I said I’ll buy the school from the pilot, though. The CFI that owned the place, didn’t pay much for it replaced all the planes with new planes did really well. 911 was part of that experience, and sold it a couple of years later. So I kind of did both for a while. But yeah, that’s how that’s how it so I, I was at Berkeley for at Calgary County and Akron, Canton. So. So when you think about all these lives that you’re talking about? Yeah, commercial lending has had a huge impact on how I run properties. It really helped me understand numbers. And being a CPA has certainly helped tax I’d certainly didn’t hurt being the private equity guy, all these things, and then operating a decentralized part 141 school. I mean, that teaches you how to run a decentralized business, which is exactly what I’m running right now. So all of these things kind of come together and have actually served me well. Now that you know, you fast forward 25 years.

Mat Zalk 43:59

I’m gonna I’m gonna Google part 141 I know 91 and 135. I don’t know.

Kenneth Gee 44:02

Most people are 131 135 or but most people are 91. Yeah, that’s yeah. 135 is a turner. Yeah, yep. And then part 141 is basically a certified pilot school, gotten to the FAA. So we got the benefit of having the FAA inspect all of our, our, our, you know, our books, our records, our processes, our airplanes, you know, it was just it was a lot of fun.

Mat Zalk 44:28

And then so you sold in service Cessna extra.

Kenneth Gee 44:32

I sold Cessna, I sold my pilot centers to somebody else.

Mat Zalk 44:37

But at the pilot centers, you actually sold Cessna airplane or you just sold the service.

Kenneth Gee 44:41

Yeah, yeah. So we covered northern Ohio, the dealer was in Cincinnati at the time, and he was like, Look covered northern Ohio. We sold a whole bunch of airplanes. What we did is we sold a lot of them and they leased them back to the school. Yeah. That’s a big deal. You probably are familiar with that. Yeah. Awesome. That was only a private pilot. And I don’t fly anymore. Mostly. Because of the monocular vision thing, it’s hard to see the hardest time to see an aeroplane is when it’s coming right at you.

Mat Zalk 45:05

Yeah. Yeah. Luckily luckily the G 1000 and ATC will give you a heads up but it can be. Yeah, no, I sent a message I called the Where’s that coming out of I can’t remember I was coming out of putting the front seat and I had like 12 o’clock and 15 miles and I had a plane coming head on same altitude. So I say ATC 350 Whiskey. I’ve got a on my scope. I’ve got a plane 15 miles out that he goes, How far did you say 350? Whiskey, you know, whatever. Denver Senator 50s How far he says it 15 miles. He said if it’s a mile, let me know if it’s 15 I got you covered. And I was like, I felt kind of foolish. I was like ATCs they’re usually always super nice. This guy was kind of a jerk. You know? I was like, yeah, yeah.

Kenneth Gee 45:47

It’ll you an hour to get to him.

Mat Zalk 45:48

I’m like, I’m up here with a bunch of other planes. I want to make sure you’re with me, but he was not having it.

Kenneth Gee 45:52

So anyways, he is you said on your scope. So when I flew T Cass was a new thing, right? Yeah. Yeah. Collision Avoidance. Yeah, all that stuff was just coming out in the cockpit, whether all that stuff was just coming out.

Mat Zalk 46:07

It’s amazing where it is now.

Kenneth Gee 46:09

I didn’t have us go. I had eyeballs. That’s what I had.

Mat Zalk 46:13

Kenneth Gee has lived multiple lives that we’ve as we’ve talked about, his first career was as a commercial lender at National City Bank, which was later acquired by PNC a second career was as a tax manager at Deloitte and Touche. And his third career was in forming KRI Partners where he currently is Kenneth has more than 24 years of significant real estate banking, private equity transactions and principal investing experience. He’s been involved in more than $2 billion of transaction value throughout his career. The fun note that we just discussed is that he’s owned and operated several Cessna pilot centers, certified Cessna pilot centers in Northeast Ohio, and the Northeast Ohio area. I would love for you guys to visit kripartners.com for a whole host of informative podcasts, introductory webinars that walk you through that through underlying underwriting deals, making real estate work for you and your lifestyle. And there’s a ton of other great information on that website. Ken we appreciate so much for being on the podcast and teaching us all about what you do.

Kenneth Gee 47:08

Well, thank you for having me, man. It’s been a lot of fun. Thanks.

Mat Zalk 47:11

Been a pleasure take care.

Outro 47:16

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